How to Budget Using the 50/20/30 Rule
Thinking about ways to better manage your finances? The 50/20/30 rule is one of the most popular techniques that you can try. It’s simple and easy to follow. You only need to categorize your spending into three categories.
50% of Your Income – Essentials
To start with, allocate 50% of your monthly income to your necessities, like your mortgage, utility bills, transportation, grocery, and more. This percentage might sound too big, but once you list down all your fixed monthly expenses, everything will certainly make sense.
It is important to smartly differentiate between your ‘needs’ and your ‘wants’. This way, you can properly allocate your money.
20% – Savings, Investments, Financial Goals
Many people find saving money a challenge but with this rule, it shouldn’t be.
20% of your income should go toward your financial goals. This includes your savings, investments, and debt-reduction payments.
Saving money is very important. You might feel like you’re too young to be saving up for your retirement but time flies so fast and before you know it, you haven’t saved enough for your future. There is also no best time to start investing but ‘now’. Learn about the different ways to grow your money, aside from just keeping it in your bank. The right investments can give you great returns.
Try to reduce your existing debts, such as your credit card and cash advance payments. Setting aside at least 20% of your monthly income for this purpose ensures that you have a good credit rating, making you more qualified for future loans in case you will need one.
30% – Flexible Spending/Your Wants
The remaining 30% of your monthly income should go to your wants. Spend it in whatever way you want – buy a new pair of shoes, a new phone or save it up for a vacation.
This percentage goes to everything you buy that you don’t need and you need not feel guilty about it. You worked hard for your money so basically, you deserve to enjoy it. However, if you live frugally, anything that remains in your flexible spending can go to your savings.
Keep in mind that the percentages in the ‘essentials’ and ‘flexible spending’ should be the maximum you should spend.
How to Get Started
Following this 50-30-20 budget plan may seem overwhelming at first. However, once you get used to it, it will surely have a positive impact on your finances.
To start with, you need to determine how much exactly you make per month as it is where you will base your 50-30-20 percentages. It can be tricky if you are self-employed.
To do this, be sure to track your earnings to determine your average income per month and budget accordingly. The key is to be mindful of your money and how you spend it.
Next, itemize your monthly expenses. It’s important to keep track of your spending. Every cent counts.
How much do you spend on your food and transportation? How about your housing and bills?
It is important that your expenses don’t exceed the 50% threshold. If it does, review your essentials. There might be some expenses that you can reduce or cut.
For example, if you are renting a house that’s too big for you or your family, you may want to downsize to reduce the cost. You can also consider moving to a location that’s near your workplace so you don’t have to drive too often to get there. Making adjustments is important to stick to the 50-30-20 allocation.
Now, don’t be upset if only a little money goes to your savings because you don’t have a huge income. As long as you are able to keep up with the 20% for your financial goals, you’re doing great. Once you get to save enough money, consider investing it for an opportunity to earn more.
The best thing about the 50-20-30 budget plan is that it gives you flexibility. You can slightly tweak it to make the strategy work better for you. As you know, every budget is different. The key is to be consistent with managing your money and being responsible for every cent you spent.
More importantly, you should make sure to cover your expenses well, save up for tomorrow, and give room for fun and leisure. Achieving a balance in your financial life is easy, as long as you are mindful of your spending habits.
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Author: Michael Austin
A blogger, personal finance enthusiast with slight “addiction” of planning and organizing whether it’s budget, business or just life in general. All this addiction evidences can be found as informative articles at his personal website awebtoknow.com.
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